Citing that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year,” as well as that “job gains have been solid in recent months and the unemployment rate has declined,” the Federal Open Market Committee (FOMC) on Wednesday voted – as was expected – to increase the Fed Funds rate by 0.25% to a range of 0.50%-0.75%.
It was the first hike since December 2015, when the Fed voted to raise the Fed Funds rate by 0.25%. What’s more, it was only the second increase since 2006.
The rate hike, which will take effect starting Dec. 15, is expected to push up mortgage interest rates – but most mortgage experts say it will increase rates only slightly and might not have much of an immediate impact.
Last year, when the Fed announced that it was considering raising rates, it said it would do so gradually – probably in increments of 0.25% to 0.75%. Whether the Fed will decide to raise rates again in 2017 will depend on a range of economic factors – in particular, the inflation rate, which still remains below the Fed’s target of 2.0%.
Despite the fact that the rate of inflation remains below 2.0%, the FOMC says in its statement that “market-based measures of inflation compensation have moved up considerably” – enough, apparently, for it to decide that a rate increase is in order.
“Inflation is expected to rise to two percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further,” the committee says in its statement. “Near-term risks to the economic outlook appear roughly balanced. The committee continues to closely monitor inflation indicators and global economic and financial developments.”
The Fed’s statement also gives some indication that the committee is planning more increases next year, however, as is to be expected, it is taking a “wait and see” approach.
The increase came as little surprise to those in the mortgage industry, as the committee had already given a strong indication in November that a rate hike was coming.
In a statement, Lindsey Piegza, chief economist at Stifel Fixed Income, says the hike was “expected.”
“The dot plot, furthermore, showed a minimally faster pace of tightening in the near term, with an expected three rate hikes next year as opposed to two projected in September,” Piegza says. “More importantly, however, the Fed’s longer-run outlook for growth and inflation was unadjusted, leaving the longer-term pathway for rates little changed. In other words, the committee sees the potential for a modest uptick in prices and activity over the next 12-24 months. But in the long run, the Fed’s forecast for a moderate [read: blah] trajectory of the economy remains. Despite the market’s more optimistic view, with pro-growth policies potentially ushered in next year, the Fed expects to maintain a slow and ‘gradual’ pace.”
“The Fed’s decision to increase its key interest rate shouldn’t be a major cause for alarm with consumers,” says Doug Lebda, founder and CEO of LendingTree, in a statement. “Mortgage rates offered to borrowers on our network have been increasing over the past few month, from an average of 3.6 percent for a 30-year fixed-rate loan in August to 4.3 percent as of today, which is a difference of roughly $90 per month.
“The good news is that lenders have been anticipating the Fed’s move and have baked the likelihood of a rate hike into their loan pricing, meaning that mortgage rates are unlikely to change dramatically from where they are today,” Lebda adds. ” The good news for housing is that if interest rates are rising because of an improving American economy, consumers are seeing higher incomes, greater job opportunities and better returns on their savings, all of which will work to help counteract rate increases. With that said, consumers should still re-visit their loans and evaluate their options while rates are still relatively low.”